Since April is Financial Literacy Month, I’ve decided to devote this week’s column to helping you gain a better understanding of your Thrift Savings Plan investment choices.

At the end of 2012, TSP plan assets stood at $330 billion, with 4.6 million participants. This translates to an average participant balance of $70,000. At the end of 2011, the G (government securities) fund held the largest balance of any of the funds, at nearly $148 billion.

Here’s a quick quiz: Why do you think there’s so much money in the G Fund?

It is viewed as safe.

Investors fear losing money or having a negative return.

The G Fund is the default choice if a participant doesn’t choose a different mix of funds.

Many employees still covered under the old Civil Service Retirement System who participate in the TSP view it as more of a savings account (short-term investment) rather than a retirement account (long-term investment).

Many people don’t understand the other investment options.

Many investors fear the market risk associated with stock and bond investments.

The answer is all of the above. Just because almost half of all TSP funds are invested in the G Fund doesn’t make it the best choice for everyone. Federal Employees Retirement System investors in particular should try to gain a better understanding of retirement investing versus saving money for the near term.

Words to Live By

Long-term investing requires an understanding of a few key terms:

Diversification: The practice of purchasing a variety of investments in order to mitigate the risk associated with any single investment.

Compounding: The rate of growth of earnings. (Hint: to learn how fast your money will double, divide the rate of return into 72. For example, if you expect a 3 percent rate of return on your investment, you money will double in 24 years, but if your investment delivers a 6 percent return, then your money will double in 12 years.)

Market risk: The risk associated with overall financial market and economic decline (also called systematic risk). Aside from not investing in financial markets at all, there is little an investor can do to eliminate market risk. Some investors try to escape it through market timing, but that is very difficult to do.

Index fund: A compilation of investments in a particular category used as a benchmark. An example is the Standard and Poor’s index of 500 large U.S. companies.

Volatility: The frequency with which investments rise and fall in value. Historical rates of return generally show that when investments fall, in most cases they eventually will rise again.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

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